Pretoria: National Treasury and the South African Revenue Service (SARS) have extended an invitation to the public for comments on the 2025 draft Taxation Laws Amendment Bill (TLAB) and its accompanying Explanatory Memorandum, which were published on 16 August 2025.
According to South African Government News Agency, the policy draft was made public on 16 August 2025, and the deadline for submitting comments is 12 September 2025. The 2025 draft TLAB suggests refining the definition of a ‘hybrid equity instrument’ in section 8E of the Income Tax Act. Presently, its approach relies on anti-avoidance criteria and a three-year rule to determine if a preference share has debt-like features, in which case the preference dividend is considered taxable income to ensure correct tax treatment.
The proposal aims to adopt a principle-based approach, classifying financial instruments based on their substance rather than legal form, similar to several other countries. For instance, if a preference share is redeemable on a set date or has a fixed mandatory dividend, it should be treated as a loan for tax purposes. This ensures that economically debt-like financial instruments are taxed appropriately, preventing misuse of dividend exemptions to lower tax liabilities.
However, numerous commentators have expressed concerns to National Treasury and SARS, arguing that the broad wording in the draft TLAB might eliminate preference shares as a viable financing option. Although the amendment is still in draft form and subject to change after further consultation, the uncertainty around the proposal is affecting current transactions and potentially delaying investments.
To prevent negative impacts on existing financing, the Minister of Finance, following advice from National Treasury and SARS, has retracted the proposal regarding the definition of a ‘hybrid equity instrument’ from the 2025 draft TLAB. Future proposals on the taxation of hybrid equity instruments will involve a consultative process with stakeholders to find a balanced tax approach considering the concerns of both stakeholders and the government before publishing draft tax legislation.